Dynamic modeling of macroeconomic factors influence on portfolio investment flows in countries with emerging markets

Abstract

Introduction: the impact of pull or push factors on capital flows has become an especially relevant issue due to the increasing importance of emerging countries in the growth of world welfare. Objectives: to identify the impact of global and domestic economic factors on portfolio capital flows to emerging markets. Methods: the work is based on applied statistical and econometric methods of regression analysis. Panel regression estimation was carried out by two-step least squares methods (instrumental variables), generalized method of moments according to the methodology of Arellano–Bond and Arellano–Bover/Blundell– Bond. The study contains a total of 2,240 observations. Results: two hypotheses were put forward: (1) global indicators of USA monetary policy have a greater impact on the inflow of portfolio investments in developing countries in crisis years than domestic factors; (2) the difference between the receiving country’s interest rate and the US rate has the most significant effect on the inflow of portfolio investment to emerging market economies among the domestic factors. The impact of the factors on portfolio investment flows was assessed using macroeconomic data for 28 developing countries, based on quarterly observations for the period 2000–2019. Conclusions: there is empirical evidence that global factors are more important in times of crisis than specific country ones. The second hypothesis was not confirmed. It was revealed that the flows of portfolio capital are most influenced by the level of international reserves and domestic political stability in the country.